May 15

No Separation – No Peace

Jamie DimonEven if your only source of news is FOX and Friends, you must certainly have heard by now that the nation’s largest bank, JP Morgan Chase, suffered a loss of at least $2 billion–and likely much more–in a botched credit derivatives trade. The trade, which spurred an all but dog-and-pony show investigation by the FBI and renewed lip-service on Capitol Hill for strengthening Dodd-Frank‘s Volcker Rule and swaps regulations, involved a corporate bond hedging strategy gone horribly wrong. A London based trader for JP Morgan assembled a huge portfolio of derivative credit default swaps and sold them off to investors based upon the trader’s wrong-headed belief that corporate bonds owned by JP Morgan would perform well. The market believed otherwise, and the once “well-intentioned” hedging strategy blew up in the face of JP Morgan chief Jamie Dimon and the rest of the masterly minds who also carry keys to the executive washroom. Losses began to mount, and rather than accept the losses commensurate with the oft-cited free market’s value of the underlying assets and derivatives, Dimon chose instead to attempt to call off the dogs by whining to the federal government yet again. Dimon, long the golden-boy of Wall Street for his perceived risk management acumen, suffered a scathing blow to his egregious ego.

Barack Obama is fond of referring to Dimon as one of Wall Street’s best and brightest.

JP Morgan is one of the best-managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion and counting,” the president said. “We don’t know all the details. It’s going to be investigated, but this is why we passed Wall Street reform.

I don’t know which claim in this sentence is the most absurd. First, if Jamie Dimon is one of the smartest bankers we’ve got, who is the worst? Good grief. If you have a potential loss looming into the many billions of dollars on a unnecessary and risky bet that was permitted to spiral out of control on your watch, you’re not a genius. If you beg Congress to limit the rules that could potentially prevent the loss from taking place in the first place, you’re an idiot whose hubris has digested whatever tiny amount of good sense you had remaining. You are by no stretch of the imagination to be held out as some captain of finance worthy of the respect of the common man and bankers alike. If you insult those who are attempting to promulgate rules to prevent you–yes you–from destroying the economy and sending millions back to the unemployment lines and soup kitchens, you are a sociopath incapable of understanding the profound effect your actions have on other human beings. You’re just another banker Mr. Dimon, and there are hundreds of thousands of people within fifty miles of Wall Street capable of stepping into your shoes and replicating your results in an instant. I only wish Barack Obama understood that simple fact. Let me backpedal a bit. In fairness, I am sure that he does understand, he just isn’t willing to act upon this knowledge. Continue reading

Mar 29

Even the Experts don’t get it

Demand Curve

Fraud Outweighs Government Action

In a recent column over at Project Syndicate, J. Bradford DeLong discusses government’s failure to match aggregate demand to aggregate supply and it’s dangerous consequences for the economy. While I agree with his premise entirely, I disagree that investing in private business is no less risky than it has been in the past. The governments of industrialized nations have indeed significantly hindered economic growth by not investing the necessary amount of money into the economy in ways that produce actual demand, but they have also done nothing to increase confidence.  He writes:

But the risk that the world’s investors currently are trying to avoid by rushing into US, Japanese, and German sovereign debt is not a “fundamental” risk. There are no psychological preferences, natural-resource constraints, or technological factors that make investing in private enterprises riskier than it was five years ago. Rather, the risk stems from governments’ refusal, when push comes to shove, to match aggregate demand to aggregate supply in order to prevent mass unemployment.

I believe that his reasoning is inherently flawed. It may or may not be any more risky today to invest in private enterprise than it was five or ten years ago, but the existing risks have been brought to light. The unavoidable consequences of the dismantling of financial regulatory schemes in the United States primarily, but also in several of the Eurozone countries have led investors to more carefully consider investments in private enterprise than they had done in the past. The reason that investment in private enterprise in industrialized nations was an attractive venture from time immemorial was because confidence in market regulation and rules enforcement engendered a notion of safety. With the notion of safety all but gone, investors now see that the emperor has no clothes. Without confidence that private equity investments will be protected from fraud and other nefarious schemes, whether the government matches aggregate demand to aggregate supply will ultimately be economically meaningless in the long term